Filipinos in South Korea

Best Investments 2013: Buy the Philippines Top-Performing Emerging Market of Q1

While the Standard & Poor's 500 Index 10% first-quarter gain was great, it wasn't the world's best.

One of the standout performances in 2013's first quarter was in a market that's off many investors' radar screens: the Philippines.

The Philippine stock market, valued at about $236 billion, rose by 17.8% in the first quarter.

Money Morning's Global Investing Strategist Martin Hutchinson told us to invest in the Philippines back in November. Hutchinson said the BRICs - Brazil, Russia, India and China - are no longer the best investments for overseas growth. Instead, it's time to focus on the true rising stars in the emerging world, like the Philippines.

As Hutchinson says, "With the right emerging markets, real growth is easier than you think."

Here's why the Philippines is expected to continue this growth in Q2.

The Best Emerging Market of Q1

The Philippines has been on the rise ever since the election of Benigno Aquino as President in 2010. Aquino's policies - to boost spending while cutting the fiscal deficit and attacking corruption - have led to a boom in both consumption and investment in the Philippines.

Last year alone, the Philippine economy grew at a robust 6.6%, up from just 3.9% in 2011. Among its Asian peers, this puts it behind only China and Thailand.

The World Bank forecasts the Philippine economy to stay strong. It predicts growth of 6.2% this year and 6.4% in 2014.

In March, the country won its first ever investment grade rating from Fitch. The ratings agency raised the rating on Philippine government debt from BB+ to BBB-. It cited the country's resilient growth, strong fiscal management by the government ("governance reforms") and solid policies by its central bank to control inflation.

And according to the Financial Times, Fitch also said that the country's external balance sheet was similar to countries with an A rating rather than those with BB or BBB ratings. No surprise then that the Philippine peso is Asia's best performing currency over the past year, rising 5% versus the U.S. dollar.

The Philippines may receive another ratings upgrade sometime in the first half of this year from Standard & Poor's. In December, S&P raised its outlook of Philippine government debt from stable to positive. It cited the stability of the Aquino administration and the country's economic growth.

Currently, S&P has the country rated one notch below investment grade.

When the upgrade happens, it will allow fund managers that can only buy investment grade bonds to buy Philippine government debt. In anticipation of this event, traders have already pushed the country's benchmark 10-year government bond yield down from 4.7% last October to 3.5% now.

Best Investments to Play Philippine Growth

Asian fund managers remain positive on the market. The head of equity capital markets at Religare Capital Markets, John Sturmey, told Bloomberg News, "We are very bullish on the Philippines for this year and the following years."

Sturmey forecasts gains of 20%-30% for 2013.

Paul Joseph Garcia, fund manager at BPI Asset Management - the Philippines second-biggest fund manager - is also bullish. He sees the economy expanding at near a 7% rate in 2013.

Garcia also believes the index may gain 29% this year to the 7,500 level. If so, the value of the stock market, for the first time ever, will exceed the size of the economy.

U.S. investors can easily track the performance of the Philippine stock market through an exchange-traded fund, the iShares MSCI Philippines Investable Market Index ETF (NYSEArca: EPHE). It's up about 18% so far this year.

One cautionary note: it is an expensive market, trading at about 18 times projected 12-month earnings. But the profit potential of EPHE is huge.

In his 2013 Emerging Markets Forecast, Martin Hutchinson delivered two other economies he ranks among the best investments to play emerging market growth. You can get those economies' names here. Forget About the BRICs Buy These Rising Stars Instead

Money Morning

The Philippines as a BRIC Economies Successor

Recently, the BRICS nations met in South Africa. Due to severe debt crises in the advanced nations, the growth prospects in these economies are no longer immune to the turmoil in the West.

Among the emerging economies, the Philippines is best-placed for an upgrade. It is favorably positioned to sustain growth in an exceptionally grim international landscape. It could even become a BRIC nation – with continued reforms.

In the sweet spot    

During the past decade, I have used much time exploring and consulting on the transformation of the major advanced and large emerging economies worldwide. What most nations find particularly intriguing are the growth lessons of the BRICs.

When Goldman Sachs identified the emerging group of potential successors to the BRICs a few years ago, the Philippines also made it into the list, in the footprints of two other major Southeast Asian nations. However, Indonesia and Vietnam have attracted much more FDI, so far.

In the aftermath of the Ramos era, the role of the Philippines as a BRIC successor was based mainly on its economic potential rather than a sustained growth record. In 2002, the Philippines gross domestic product still amounted to $81 billion, in current prices. Today, it has tripled to $241 billion.

In the aftermath of the global crisis, the Philippines is one of the few nations in which forecasts are revised up by financial analysts. In January, it reported 6.8 percent year-to-year growth, which made it the growth leader in Southeast Asia.

Almost half of the recent growth can be attributed to private consumption, which has been coupled by investment, especially in construction. Due to the impending mid-term elections in May, government spending will accelerate through the spring.

The acceleration of domestic demand since the first quarter of 2012 reflects the country's solid macroeconomic fundamentals, stronger government finances, and confidence in the Aquino government's commitment to reform.

Along with current account surpluses and foreign exchange reserves, the growth record has given rise to a more diversified export basket, while shielding the economy from very challenging international headwinds.

Complacency is not an option

The beauty of the BRIC projections is that they allow policy architects to reflect on (very) long time perspectives. The trap of the same projections is that, when they create a sense of inevitability, they can lull even the most promising growth stories into complacency.

In the Philippines, delivering the growth promise is predicated on accelerated structural progress.

According to various competitiveness indicators, the country has made dramatic strides in improving competitiveness, though often from a very low base. The perception is that corruption and red tape are finally addressed decisively. With the strong macroeconomic performance, the financial sector has become supportive of business activity.

Despite these positive trends, weaknesses remain to be addressed, including the poor infrastructure, various market inefficiencies and labor market rigidities.

As the Aquino administration knows only too well, the economy needs to shift from consumption towards investment, both public and private. Sectorally, this requires rising productivity in agriculture, less dependence on low-wage and low-skill services and more on labor-intensive manufacturing and high value services.

In BRIC economies, such changes have typically preceded periods of sustained growth. However, in order to raise the incentives for job creation and entrepreneurship, they require difficult policy reforms in agriculture, manufacturing, business and labor regulations, and social protection.

In turn, these reforms make possible greater public investment in health, education, and infrastructure.

BRIC future requires more inclusive growth              

In the absence of adverse developments, the Philippines is at the verge of receiving an investment-grade rating, by the major rating agencies.

Nonetheless, significant challenges of poverty remain. Growth is not yet inclusive.

Except for Brazil, inequities have typically increased in all emerging economies during their high-growth phases, while job-creation has been strong and unemployment low. In the Philippines, the story is different.

Even in 2011-2012, unemployment rate stayed at 7%, while underemployment rate rose to 22.7% since the number of full-time jobs declined by half a million in the same period.

In the next half a decade, GDP growth rate in the Philippines could climb close to that of China. But in order to be sustained, this growth must become more inclusive.

In the Philippines, the BRIC future has potential for a large consumer economy, with some 150-170 million people by 2050. That objective is predicated on huge expansion of consumption – but it is only viable through more inclusive growth.

Due to the historical legacies of the Philippine political and economic institutions, there remain strong vested interests in the current status quo. That, in turn, makes vital reforms challenging to implement.

The Aquino administration has proven able and willing to make difficult decisions. In all BRIC nations, sustained growth has been neither inevitable nor automatic. It does not just happen. It must be made to happen. And sometimes that requires painful decisions in the short-term because they make possible sustained growth in the long-term.

An abbreviated version was published by The Philippine Daily Inquirer on April 1, 2013

Economonitor 

NORTH KOREA prepares to test medium-range ballistic missile as it CLOSES BORDER with CHINA; PHILIPPINES prepare for Nuclear Winter in mid-summer

  • US satellites have located North Korea's missiles
  • They have been pictured fueled and ready for launch
  • Fears North Korea will not issue test-fire warning

NORTH Korea has closed its border with China, turning back tourists as nuclear tensions continue to mount.

An official at the Dandong Border Office, who declined to give his name, told media: "Travel agencies are not allowed to take tourist groups to go there, since the North Korean government is now asking foreign people to leave. As far as I know, business people can enter and leave North Korea freely."

The move comes after it was revealed United States spy satellites had found two 'missing' North Korean nuclear-capable missiles.

CNN reported US officials were expecting a launch by North Korea "at any time".

Any such "test" launch would be seen as a further escalation of already high tensions in and around the Korean peninsula.

Things could be made worse if North Korea does not issue a "standard warning" of a missile test firing to commercial aviation and maritime shipping.

"We hope they issue a notification but at this point we don't expect it. We are working on the assumption they won't, "the official said.

US officials have confirmed that satellites have been kept over the suspected launch areas for the past week in order to locate - and monitor - the launch vehicles. Bad weather has made their job harder, they said.

The launchers are said to be about half-way down the North Korean east coast and about 20km inland. Satellite imagery shows the missiles have been fuelled and positioned for launch.

The Pentagon has announced it is ready to respond to any missile aimed at America or its allies.

US and South Korean officials have said that the Pyongyang regime may launch the missile as early as Wednesday.

The commander of US forces in the Pacific sought to reassure Congress that the Pentagon would be able intercept a missile. US satellites and radars in the region will be able to detect and quickly calculate the missiles' trajectory.

This would help determine if the launch was hostile - or a test.

The missiles would be shot down by land or sea based anti-missile weapons if they were to track over South Korea or Japan.

Navy Admiral Samuel J. Locklear said: "We have a credible ability to defend the homeland, to defend Hawaii, to defend Guam, to defend our forward deployed forces, and to defend our allies,'' Locklear told the Senate Armed Services Committee.

The US has never sought to shoot down a North Korean missile, and it's unclear if such a move would escalate the tension that has roiled the region. The Obama administration has moved additional military forces into the Pacific, but has sought to calibrate its response in the matter to avoid fueling the crisis.

A "counter-provocation plan" drawn up by US and South Korean officials calls for their combined military forces to respond proportionally to a North Korean attack, but to avoid any step that could set off an escalation of hostilities.

United Nations Secretary-General Ban Ki-Moon has warned that even a slight miscalculation on the Korean peninsula could spiral into an "uncontrollable situation" as he urged North Korea to tone down its provocative rhetoric and ease the "very dangerous" level of tension.

Earlier, Pyongyang urged all foreign companies and tourists in South Korea to evacuate, saying the two countries are on the verge of nuclear war.

The new threat appeared to be an attempt to keep the region on tenterhooks over its intentions.

Analysts see a direct attack on Seoul as extremely unlikely, and there are no overt signs that North Korea's 1.2 million-man army is readying for war, let alone a nuclear one.

South Korea's military has reported missile movements on North Korea's east coast but nothing pointed toward South Korea.

Still, North Korea's earlier warning that it won't be able to guarantee the safety of foreign diplomats after April 10 has raised fears that it will conduct a missile or nuclear test today, resulting in US retaliation.

The United States and South Korea have raised their defense postures, and so has Japan, which deployed PAC-3 missile interceptors in key locations around Tokyo yesterday as a precaution against possible North Korean ballistic missile tests.

"The situation on the Korean Peninsula is inching close to a thermonuclear war due to the evermore undisguised hostile actions of the United States and the south Korean puppet warmongers and their moves for a war against" the North, said a statement by the North Korean Asia-Pacific Peace Committee, an organization that deals with regional matters.

The statement is similar to past threats that analysts call an attempt to raise anxiety in foreign capitals. Observers say a torrent of North Korean prophecies of doom and efforts to raise war hysteria are partly to boost the image of young and relatively untested leader Kim Jong-un at home, and to show him as a decisive military leader.

Another reason could be to use threats of war to win Pyongyang-friendly policy changes in Seoul and Washington. Last week, North Korea told foreign diplomats in Pyongyang that it will not be able to guarantee their safety as of Wednesday. It is not clear what the significance of that date is.

Tourists continued to arrive in Pyongyang despite the war hysteria.

Australian Mark Fahey of Sydney said he was not concerned about a possible war.

"I knew that when I arrived here it would probably be very different to the way it was being reported in the media," he told The Associated Press at Pyongyang airport. He said his family trusts him to make the right judgment but "my colleagues at work think I am crazy."

Chu Kang Jin, a Pyongyang resident, said everything is calm in the city.

"Everyone, including me, is determined to turn out as one to fight for national reunification ... if the enemies spark a war," he said, in a typically nationalist rhetoric that most North Koreans use while speaking to the media.

In Seoul, South Korean Presidential spokeswoman Kim Haing told reporters that the North Korean warning amounted to "psychological warfare."

"We know that foreigners residing in South Korea as well as our nationals are unfazed," she said.

South Korean President Park Geun-hye, who has sought to re-engage North Korea with dialogue and aid since taking office in February, expressed exasperation with what she called the "endless vicious cycle" of Seoul answering Pyongyang's hostile behavior with compromise, only to get more hostility.

Yesterday North Korea said it was suspending work at the Kaesong industrial park near its border, which is combines South Korean technology and know-how with North Korea's cheap labor. North Korea pulled out more than 50,000 workers from the complex, the only remaining product of economic cooperation between the two countries that started about a decade ago when relations were much warmer.

Other projects from previous eras of cooperation such as reunions of families separated by war and tours to a scenic North Korean mountain stopped in recent years.

Miriam warns Philippines: Prepare for 'nuclear winter

Senator Miriam Defensor Santiago, an expert in international law, warned the country of a "nuclear winter" should the ongoing tensions in the Korean peninsula escalate further.

Santiago said the so-called "nuclear winter" creates "dust clouds absorbing the sunlight, dropping temperatures, and damaging agriculture in wide areas of our country."

Initially, a nuclear weapons blast – with the Philippines a possible victim – will release a "fireball of extremely high temperature, Philippine environment could be degraded for generations." Residual effects include severe damage to health, such as leukemia, congenital defects and mental retardation, she said.

But with nuclear taboos compromised due to countries already thinking of striking back, the Philippines should be ready instead with analysis of laws that it could bring to international courts should it become a victim to the standoff.

"Should armed conflict arise, the Philippines should be ready with analyses of certain laws applicable in armed conflict, notably human rights conventions, the Genocide Convention, international humanitarian law, the principle of neutrality, and environmental law," Santiago said.

She said the shift is now towards risk management.

Philippines a Neutral state

Santiago said countries have to respect the integrity of neutral states like the Philippines.

"North Korea would fall under the duty to justify the use of particularly destructive weapons, if they seriously affect neutral countries like the Philippines. The consequences entailed by unjustified use will be governed by the law of state responsibility," she said.

She also noted the country is protected by the principles of environmental law, such as the 1978 ENMOD Convention or the Convention on the prohibition of military or any other hostile use of environmental modification techniques.

"This convention prohibits the use of weapons which have 'widespread, long-lasting, or severe effects' on the environment."

Combat

She also noted there is no treaty that would provide rules in the use of nuclear weapons in combat. "Present treaties deal only with manufacturing, testing, possession, proliferation, deployment, limitation, and reduction of nuclear arms," she said.

While the UN General Assembly has condemned nuclear arms, there are no resolutions adopted by all members, she stressed.

Nonetheless, she said that a nuclear strike hitting the Philippines constitutes a grave breach of humanitarian law.

"Hence, under international law, North Korea would assume the duty to pay reparations, which can amount to extreme proportions. In addition, use of the atomic bomb may qualify as war crimes and as crimes against humanity, under the Rome Statute of the International Criminal Court," she said.

With reports from ABS-CBN News and News.co.au

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